Sector Spotlight
Of the 31 CBDs tracked by
Cushman & Wakefield, more
than half saw quarterly declines
in vacancy during the second
quarter, nearly doubling the rate
during the first quarter of 2010.
The CBDs with the largest
quarter-over-quarter declines
in vacancy included Atlanta, Ft.
Lauderdale, Phoenix, Oakland,
Calif., and Midtown Manhattan.
“Markets throughout the U.S.
continue to strengthen, as it becomes strongly apparent that the
national vacancy rate for CBDs
has peaked,” says Maria Sicola,
executive managing director and
When office REITs recapitalized,
they were able to sell the story
of a strong balance sheet and
liquidity position, which directly
translated into leases and
confidence among tenants.
head of Americas Research for
Cushman & Wakefield. “In-
creased leasing activity has con-
tributed to declines in vacancy.”
Nationally, the year-to-date
absorption rate, a measure which
indicates the net change in occu-
pied space, was negative 441,498
square feet at midyear 2010, a 98
percent increase in absorption
from the negative 24. 9 million
square feet at midyear 2009.
With increased absorption and
decreased vacancies, rental rates
across the U.S. are bottoming.
The average U.S. CBD rental
rate declined slightly from the
end of the first quarter of 2010,
down approximately 1 percent to
$36.49 per square foot at midyear
2010. While 19 of the 31 CBDs
tracked by Cushman & Wake-
field posted quarterly declines
in rental rates, in 13 cases the
declines were less than 3 percent,
a slowdown of the dramatic de-
creases seen in previous quarters.
Advantageous Position
As leasing activity continues
to increase, office REITs are in
the perfect position to take advantage of tenant demand, says
Bill Krouch, CEO of Markets –
America for Jones Lang LaSalle.
“Because office REITs have
less debt and are less focused
on maturities, they can focus on
using their strength in the ten-
ant market,” Krouch says. “They
have money to make the deals,
and that is an advantage. Tenants
are concerned from a capital per-
spective, and landlords with fi-
nancial strength are viewed more
favorably by tenants. To that end,
office REITs are well positioned
to provide the upfront capital
needed to close deals.”
Office REITs have been able
to entice leasing brokers and as-
sure tenants they can fund tenant
improvements by putting money
in escrow. “In this environment,
tenants are underwriting their
prospective landlords,” Knott
says. “When office REITs recap-
italized, they were able to sell the
story of a strong balance sheet
and liquidity position, which
directly translated into leases and
confidence among tenants.”
Digging For Deals
With fundamentals expected
to be weak for the next several
quarters, office REI Ts continue
to look externally for growth.
“Internal growth is out of the
question, so office REITs have
to look either to development
or acquisitions to move the
needle,” Knott says. “Since de-
velopment probably won’t make
sense for a couple of years, they
will focus on acquisitions.”
Yet, quality assets are still hard
to find, and investment sales
activity is just now starting to
recover. During the first half of
2010, roughly $14.1 billion worth
of U.S. office properties traded
hands, nearly double the amount
of just one year ago, according to
Real Capital Analytics.
Jennifer D. Duell is a regular
contributor to REIT magazine.
